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Market shocks speed up evolution

And so it came to pass that Fannie Mae and Freddie Mac, the US’ two largest mortgage consolidators, were effectively nationalised as their weaknesses in the face of $14.9bn in net losses posed an unacceptable risk to the US economy and by extension, the world’s.

With around $5.2trillion worth of debt and mortgage-backed securities on their books, for decades these two organisations have securitised prime loans from approved lenders and sold them to investors.

For many years there was an implicit understanding that the firms were gilt-edged – a cheque I doubt the US Congress ever thought would be cashed. It was wrong.

And before the ink dried on the documentation, a class action law suit was filed by disgruntled investors pursuing a claim for damages against four of Fannie Mae’s former chief executives for misrepresenting its accounting figures. They are after generous compensation packages. Only in America…

The fact that the world’s markets responded positively to the nationalisation, most notably the banking sector, is testament to the fact that it was probably the right thing to do. Nevertheless, it would have been unthinkable only a year ago.

Naomi Klein’s recent book The shock doctrine: the rise of disaster capitalism provides insights into this phenomenon. Klein’s concept of shock doctrine is that when catastrophes strike they present big organisations with immediate opportunities to do things that otherwise would have taken years to achieve.

For example, when the devastating tsunami hit South-East Asia in December 2004 it allowed the government of Sri Lanka to force fishermen off the country’s beaches to sell the land to developers, something it had been trying to do for some time. And we all know the destruction wrought on 9/11 gave President George W Bush a pretext for the invasions of Iraq and Afghanistan.

It seems that in periods of instability all things are possible. In many cases massive changes are waved through that previously would have been rejected. We have seen several instances of such behaviour in the UK in recent months, including the nationalisation of Northern Rock.

Look at petrol prices. When they spiralled at the beginning of the decade there was uproar. Haulage firms brought the road network to a standstill, refineries were picketed and demonstrators marched on Westminster. But in the face of a downturn in the global economy, high oil prices and instability in the Middle East, we pay £1.35 a litre with barely a grumble.

It could also be argued that the shock doctrine has also been adopted by the Financial Services Authority, with many brokers being fined or forced into enforcement at a time when the mortgage sector is on its knees. The credit crunch has given the regulator more leeway to clean up the market.

Equally, many companies in the mortgage market have decided to implement changes in strategy that would have been unthinkable just months ago. Today they are accepted readily because of market conditions. Several stages of evolution have been leapfrogged in a single bound.

There are now calls for Whitehall to adopt the same strategy as the US government and establish some form of government-backed central mortgage securitisation facility. But as attractive as this sounds there are many who don’t believe it is the way forward.

For many years our industry has functioned well as a free market economy. If it became gilt-edged we would return to something like the situation in the mid-1980s before the abolition of the Building Societies Association’s control of interest rates. It would be a sterile and flat housing market, something nobody wants to see.

The market will go through more twists and turns before it returns to a semblance of normality but the situation we now find ourselves in is plain – we must have the courage to take steps that were once unthinkable. This could prove to be the difference between companies that survive the downturn and those that don’t.


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